Greenwashing made in Europe by Michelin and BNP Paribas in Indonesia

The text below consists of the 4 parts of the series published in November 2022 within the investigation hosted herehttps://voxeurop.eu/en/investigations/investigating-green-finance-made-in-europe

Michelin and its Indonesian partner had the planting of rubber trees on land torn from the virgin forest in Indonesia financed by "green" certified bonds marketed by BNP Paribas. After a year and a half of investigation in partnership with Tempo magazine in Jakarta, we reveal the flaws of green finance and how eco-responsible investors were duped.

Chapter 1
https://voxeurop.eu/en/greenwashing-european-green-finance-paying-deforestation-indonesia-case-michelin/
European green finance is paying for deforestation in Indonesia: the case of Michelin
Designed to support sustainable development projects, green finance is not always as benign as its protagonists would have us believe. A certified "green" project may have helped destroy rainforest, thus deceiving its eco-conscious investors. In a detailed investigation, Voxeurop lifts the veil on a vast greenwashing operation carried out in Indonesia by Michelin, the world's biggest tyre manufacturer.

Introduction: the green gold rush
In the fight against global warming and its consequences, green finance looks like a formidable lever. Investing in sustainable, environmentally friendly projects rather than in fossil fuels - it is an obvious opportunity to respond to the increasingly pressing demands of public opinion and certain investors.
So it is not surprising that a growing number of companies are using green finance to develop their business. They are driven by a genuine commitment to ethics and ecology, as well as the wish to spotlight their virtue in corporate communication.
Developed in the 2010s and formalised by the Paris Climate Agreement in 2015 (the date is important, we will come back to it), the term “green finance” encompasses an array of tools, instruments and actors. It features acronyms and mechanisms that are not always easy to understand.
While we have endeavoured to make the following information accessible and understandable, the subject matter remains challenging. The good news is that by the time you get to the end of this story, your perspective on green finance should be as clear as a primeval forest razed by chainsaws.
Let's begin with Michelin. Among the European companies that pride themselves on their "sustainable" policies, the tyre giant highlights its commitment to "responsible and sustainable management of the rubber industry (rubber tree cultivation), [...its] ambition of zero deforestation, and its commitment to protecting biodiversity". This is how the firm reassures its shareholders and customers that its tyres are more eco-friendly than those of its competitors.
The flagship of Michelin’s commitment to sustainable natural rubber is the Royal Lestari Utama (RUL) project in Indonesia. Created in 2015, it is a joint venture between Michelin and its local partner Barito Pacific. The project is presented in commercial videos as the ultimate success story: planting rubber trees to reforest areas devastated by illegal logging, while creating jobs for local people and protecting flora and fauna - in particular, elephants, orangutans and baby tigers. All this with the involvement of the World Wildlife Fund (WWF), the United Nations Environment Programme (UNEP) and the United States Agency for International Development (USAID), who together have presented it as a model of a sustainable value chain.
After an alarming report by the environmental NGO Mighty Earth in 2020, an investigation conducted by Voxeurop over more than a year and a half with our partners from Tempo magazine in Jakarta shows the limits of this operation financed by $95 million of "green bonds". From the hushed offices of Europe to the Indonesian forest, via the trading rooms of Singapore, our reporters have scrutinised documents, reports and correspondence, and interviewed the main players in the companies, NGOs and local communities concerned. The picture that emerges is not the happy one sold to European investors.
In June 2022 Michelin made a full takeover of the RLU joint venture. This led, two months later, to the early redemption of the green bonds issued by French bank BNP Paribas, more than 10 years before their scheduled maturity. Investors therefore no longer have a say in the matter. However, they will surely be interested to know the impact of the operation they helped to finance.
Beyond the actors directly concerned, and beyond the affair’s impact on Indonesian people and biodiversity, our investigation also lifts the veil on the structural problems of the young green-finance movement: opacity of the certification mechanisms, non-binding voluntary commitments, absence of independent audits, and hype for projects that are supposed to be emblematic of a - finally - sustainable economy.
It highlights the problems created by the lack of effective regulation at EU level that might have a real impact on biodiversity and the climate crisis, especially when European multinationals operate far from our shores. The European Union has taken up the issue and is currently working on a regulation concerning green bonds, but this will only come into force in 2023. Another concerning imported deforestation is also in the process of being approved.

Michelin goes green
Officially, the story begins on 14 December 2014, when Michelin acquired 49% of Royal Lestari Utama (RLU), an agro-forestry company owned by the Indonesian conglomerate Barito Pacific Group. The latter was founded and led by the wealthy businessman Prajogo Pangestu, dubbed the "Timber King" of Indonesia. According to the Mighty Earth report cited above, the company already had a track record of deforestation, land grabbing, illegal logging and offshore tax evasion using a complex network of companies involved in timber, pulp and palm oil.
While the company of the Michelin Man had been present in Indonesia since at least 2004, the joint venture with Barito Pacific, formalised at the beginning of 2015, had the political support of the Indonesian government. It had very grand ambitions: to contribute in a sustainable way to around 10% of Michelin's global supply of natural rubber, by relying on local communities for production and protection of ecosystems. Several sites are involved, in the provinces of Jambi (Sumatra island) and Kalimantan (Borneo island).
To strengthen the credibility of its "green rubber" project, Michelin decided to involve WWF in its venture with Barito Pacific. Later WWF was co-opted into the Global Platform for Sustainable Natural Rubber (GPSNR), created by Michelin itself in 2018.
"We have long campaigned to stop deforestation in Sumatra, highlighting the extensive deforestation perpetrated by companies like Barito Pacific Group [...]. So when the opportunity arose in late 2014 [...] to influence what would become the Royal Lestari Utama project, we saw this as a valuable opportunity [...] to achieve a milestone," a WWF spokesperson told Voxeurop on condition of anonymity. "We partnered with Michelin [...] in order to help transform the natural rubber market, to reduce the company's global environmental footprint and to preserve priority ecosystems."
Michelin was at the time making substantial efforts to green its operations and its image, across the world. The firm received the highest score for corporate social and environmental responsibility among the companies audited under France's Duty of Vigilance law. It also committed to a biodiversity roadmap for 2030 and published data on the impact of its business on climate change.
It was in this laudable spirit that Michelin encouraged Barito to go green as well. In March 2015, the two companies signed a no-deforestation commitment: future expansion of RLU's rubber concessions would only be possible on existing farmland, respecting wildlife habitats.
A funding-starved project saved by the green-bond gong
Upon signature, Michelin aimed to increase production in the Barito concessions from 0.7 to 1.8 tonnes of natural rubber per hectare. The annual target was around 80,000 tonnes per year. Three quarters of this production would go to Indonesian factories supplying Michelin through its supply subsidiary, Société des Matières Tropicales (SMPT), with the rest going to external buyers.
Together, the two shareholders of RLU bet on a 23-year business plan until 2040. They put a combined $100 million of equity into the coffers of the joint venture (in which, following a subsequent recapitalization, Michelin will have paid 55 million in total). This was less than necessary to sustain their risky project, given that their forecasted profits were cut by the drop in rubber prices in 2015.
Luc Minguet, a former board member of RLU, told Voxeurop that "the original plan was to have banks finance the project. However, despite WWF's involvement in the project, no traditional bank agreed to finance it. They didn't think it was profitable enough." Alex Wijeratna, senior director at Mighty Earth, agrees: “The banks' due diligence must have shown up extensive deforestation, reports of violent conflict with local communities and allegations of land grabbing during the pre-establishment phase of the RLU project in Jambi. Most likely these circumstances put them off from financing it.” Only just launched, the project was floundering.
Fortunately for Michelin, in October 2016 a golden opportunity to bail out the joint venture presented itself when BNP Paribas bank co-founded the Tropical Landscape Finance Facility (TLFF) with the support and oversight of the United Nations Environment Programme (UNEP). Approved by the Indonesian government and based in the capital Jakarta, TLFF describes itself as an innovative financing platform for commercial ventures related to the Paris Climate Agreement (just signed in 2015, more on that later) and the Sustainable Development Goals.
"Unless we persuade the private sector - using the prospect of profit - to look at production differently, nothing will change," said a source from Asia Debt Management (ADM Capital), a Hong Kong-based investment firm. The source, who wished to remain anonymous, was speaking to Voxeurop. As co-founder of TLFF alongside the UN and France’s BNP Paribas bank, ADM Capital was responsible for ensuring that the funded projects met specific performance conditions.
Satya Tripathi, former secretary general of TLFF, that he founded when he was director of the Indonesian office of the United Nations UN-REDD (Reducing Emissions from Deforestation and Forest Degradation) programme (and now secretary general of the Global Alliance for a Sustainable Planet), told Voxeurop that Michelin and its Indonesian partner Barito Pacific contacted the TLFF in November 2016. It was just weeks after this funding platform’s launch by the UN’s environmental arm and BNP Paribas. The French bank, whose declared objective was to “unlock private finance [...] that reduces deforestation and forest degradation and restores degraded lands”, had been looking for an emblematic first project to attract green-minded investors. RLU's candidacy came at the right time. For all concerned, it was a golden opportunity.
Following a certification process whose transparency and sincerity raise many questions (see chapter 2), TLFF launched its pilot offering (TLFF I) of long-dated bonds in the spring of 2018, to "help finance a sustainable natural rubber plantation [...] in two provinces in Indonesia"(2)
BNP Paribas took over the marketing of the green bonds issued by TLFF, which would use the proceeds of the bonds to provide a loan to RLU. This loan would allow the Indonesian company to invest so as to increase the yields of its plantations, and thus boost financial profitability of the bonds. And BNP Paribas and ADM Capital received a nice commission in the process. Now imagine an environmentally conscious European investor, who drives an electric car with Michelin tyres. They skim over the phrases in the BNP Paribas prospectus (4) that convinced them to buy green bonds: "this once fully forested landscape has suffered severe deforestation in recent years"; "the Borrowers have already planted approximately 18,076 hectares of rubber trees by December 2017"; "[they] plan to generate [...] natural forest areas providing habitat for tigers, elephants, and orangutans" and "carbon sequestration through the development of rubber plantations". The investor’s money is actively fighting climate change, while at the same time holding out the prospect of profit. Win-win.
Deforesting, then “reforesting” with green bonds
Alas, that is not the full story. Our investigation reveals that the story did not begin in 2014 with a handshake between Michelin and Barito. It started several years earlier.
The signing of the joint venture came just a few months after the end of a vast forest clearance operation initiated in 2010 by one of Royal Lestari Utama's subsidiaries, Lestari Asri Jaya (LAJ), at the gateway to the Bukit Tigapuluh national park in Jambi province (on Sumatra). Michelin was already fully aware of this deforestation (see Chapter 2) when it began discussions with Barito Pacific that led to the 2014 agreement. This was well before it sought to have its rubber plantations financed by green bonds, under the banner of reforestation.
Michelin staff had in fact visited the LAJ concession several times since 2013, when the strategic partnership with Barito Pacific was launched (5). But while the French multinational was conducting field surveys and negotiating its deal with the Indonesian conglomerate, in RLU-owned concessions in Jambi bulldozers were relentlessly destroying lush vegetation in order to replace it with rubber trees. These operations mainly took place in the LAJ concession, but the smaller neighbouring Wanamukti Wisesa (WMW) concession was also affected(6).
What investors could therefore not know is that a large proportion of the supposedly sustainable rubber plantations - the product of fundraising orchestrated by a UN body and BNP Paribas - grew out of the ashes of native trees cut down by Royal Lestari Utama's subsidiaries in Jambi, prior to the Michelin-Barito Pacific joint-venture.

The equivalent of over 8,000 football fields razed by 2015
In the run-up to its joint venture agreement with Barito, Michelin commissioned an audit from the British non-profit environmental consultancy TFT (now transformed into a Swiss-based foundation called Earthworm). According to the findings of this study, which Michelin did not wish to make public (see Chapter 2) and of which Voxeurop obtained a copy, RLU had deforested about 3,500 hectares of forest in the LAJ concession between 2012 and 2014. And this figure, calculated on the base of LAJ's annual operating plans, is in fact grossly underestimated.
A better estimate of the extent of the environmental destruction only recently emerged, just before Michelin completed the redemption of the so-called green bonds in August 2022. The latest independent report on the environmental status of the LAJ concession, published by Remark Asia and Daemeter Consulting in May 2022, cites official government data: between 2011 and the end of 2014, the company converted 5,782 hectares of forest into rubber plantations - the equivalent of almost 8,260 football fields or the size of Paris urban agglomeration.
Even this figure seems to be a gross underestimate according to Leo Bottril, CEO of the geospatial technology company Maphubs and the first person to draw public attention to the situation. His satellite calculations were included by the NGO Mighty Earth in its October 2020 report (and again in the 2021 one).
Recently, Bottril shared with Voxeurop an updated map. It shows that an estimated total of 8,468.46 hectares had been deforested by RLU within the LAJ and WMW concessions in Jambi prior to the 2014 joint venture. The conclusion that can be drawn from these figures is that a large portion of the rubber plantations financed by the green bonds are located in the area that was deforested in Jambi province by RLU before Michelin became a shareholder - deforestation of which Michelin was fully aware according to our investigation.
Indeed, according to RLU's 2020 sustainability report, the green bonds financed the first 19,000 hectares of rubber trees planted since 2008 (until end of 2014, plantations were mostly located in the province of Jambi, Sumatra, and to a lesser extent in Borneo).
The areas of deforestation indicated in the report by Remark Asia and Daemeter Consulting and by Bottrill represent, on average, a third of these 19,000 hectares.
Did green bonds pay for deforestation?
The fact that RLU used a loan financed by green bonds to plant rubber trees on the site of a newly deforested tropical forest raises many questions. Moreover, RLU used one third of the borrowed money to repay earlier bank loans, which had financed rubber plantations prior to Michelin's involvement. This is confirmed by the BNP Paribas prospectus and other documents examined by Voxeurop(7).
It turns out that about a third of the area of the plantations financed by the green bonds had already been cleared and partially planted with rubber trees by RLU, using bank loans. This took place before the joint venture with Michelin. RLU then used a third of the value of the bonds to repay the loans.
"Essentially, it appears that a significant portion of the $95 million TLFF loan was used to cover expenses incurred by Royal Lestari Utama to deforest and plant rubber trees in a globally important wilderness area," says Alex Wijeratna, of Mighty Earth in response to the Voxeurop revelations. "It is safe to conclude that green bondholders have unwittingly rewarded environmental destruction with about a third of their investment."

A seemingly legal greenwash
None of this is necessarily illegal. In 2010, RLU received a government permit to plant timber and rubber trees for up to 60 years based on an environmental impact assessment from 2009. The company has also been awarded a certificate of sustainable forest management by the Indonesian government (see Chapter 3 of our survey, coming soon).
Officially, the investors thus had an unquestionable right to receive income from the sale of rubber, including from rubber trees grown in an industrially deforested area that was previously home to elephants, orangutans and tigers. All three animals are on the International Union for Conservation of Nature's Red List of threatened species.
Presence of elephants (black), orangutans (orange) and tigers (red) in the LAJ concession in 2009. Source: MapHubs.
Yet, "what investor would want to invest in a 'green project' that has deliberately eradicated a pristine rainforest inhabited by indigenous people and home to three iconic species, all while releasing huge carbon emissions that contribute to climate change?" laments Alex Wijeratna of Mighty Earth. "Michelin's customers would be shocked to learn that elephant habitat has been cleared to grow the rubber needed to make their tyres," adds Leo Bottril of Maphubs.
Investors who get their money back are less likely to complain
In February 2022, TLFF, the green financing platform of the United Nations and BNP Paribas, itself requested repayment of the loan, citing RLU’s failure to meet the annual interest payment deadline. TLFF persuaded the bondholders to accept Michelin's proposal for early repayment (the maturity date was February 2033). It is conceivable that, with rubber production facing financial difficulties, Barito offered Michelin full ownership of RLU in return for settlement of its debts.
"Michelin initially went for the green bonds despite the rather high interest rate, because it had no interest in investing more of its own money in a company it did not control," notes a well-informed source. This remark underlines the fundamentally commercial nature of this eco-finance operation. "After taking full control of RLU, Michelin found it more convenient to repay the loan and then borrow at lower rates in the market."
The project managers want to be reassuring vis-à-vis the investors: "as part of the purchase of Barito Pacific's shares in Royal Lestari Utama, the Michelin Group has committed to continuing to meet RLU's environmental and social objectives over the long term, beyond the repayment of the TLFF bonds," according to the official statement.
ADM Capital and UNEP, who were among the architects of the TLFF financing platform, have indicated that they will each retain seats on RLU's advisory board on sustainability. Their intention is to ensure that independent audits will continue to be conducted to check progress against promised outcomes.
The project's achievements have been assessed annually (from 2018, date of the bonds issuance), based on environmental, social and governance (ESG) criteria to which RLU has signed up, including those stipulated in the TLFF guidelines.
However, compliance with these criteria is entirely voluntary and cannot be enforced by public authorities. The prospectus accompanying the green bonds also states that the ESG principles mentioned "are not [...] legally binding on the issuer or any other party (including RLU, currently a subsidiary of Michelin)".
The weakness of the commitments made through the bond issue is now all the more obvious given that the investors, having been reimbursed for their outlay, are out of the picture. "The less outside investment there is in a project, the less transparent it will be and the less say stakeholders will have in its progress," a lawyer specialising in business law told Voxeurop. "I don't know if this is what motivated Michelin to buy back the green bonds, but the consequence is that these bondholders will be very unlikely to pressure the company to live up to what it originally announced."
In other words, Michelin has no obligation to generate future social and environmental benefits in return for the funding obtained through the bonds, to compensate for the ecological devastation perpetrated by Barito Pacific in the past.
WWF's withdrawal from the project in March 2020 does not point to a happy - green - outcome. "We have concerns about their commitment to conservation and their lack of transparency," said a WWF spokesperson in explaining the decision to walk away from Michelin. "All our concerns have been passed on to the highest authorities at Royal Lestari and Michelin so that they may act accordingly."

Footnotes
1) The cost of planting was quite high ($5,000 to $10,000 per hectare), while the price of natural rubber was already extremely low ($2 per kilo, six times lower than in 2006). Rubber production will only reach large volumes from 2022/2023 onwards and it will take another 20 years before it becomes profitable, assuming that the price rises to at least US$4 per kilo.
2) After developing a mechanism to meet RLU's funding needs, the TLFF has not undertaken any other such project since.
3) According to a source who wishes to remain anonymous, BNP Paribas received a fixed commission of approximately 1% of the value of the transaction, or approximately $950,000. ADM Capital declined to disclose its share of the proceeds.
4) Technically called the Offering Circular, it refers to the Vigeo Eiris bond certification report. To make the deal look robust compared to average private investments, TLFF listed the green certification, with the accompanying prospectus, on the Singapore Stock Exchange - Southeast Asia's main financial centre, where Barito Pacific's headquarters and the regional branch of BNP Paribas are located. See Chapter 2.
5) Their first agreement was to build a $435 million factory to produce synthetic rubber on the island of Java.
6) Barito Pacific has been the deus ex machina of this industrial clear-cutting from the start, through an opaque Russian-doll-like corporate structure. Although formally taken over by RLU in 2011 and 2014 respectively, LAJ and Wanamukti Wisesa had been indirectly majority owned since 2008 by Prajogo Pangestu, who also took control of RLU in the same year.
7) A closer look at the BNP Paribas prospectus reveals that the TLFF loan, financed by $95 million in bonds, was largely allocated to the commercial component of the project (including 'direct and indirect costs' and 'essential plantation expenses'). RLU declined to provide a precise breakdown of these expenses. However, the prospectus cites RLU's financial statements, which include both expenses related to the development of rubber production between 2011 and 2016, and interest on mortgages provided by Bank Negara Indonesia (BNI), an Indonesian state-owned bank, to finance the operations. The total amount is $36 million, or just over a third of the value of the bonds ($95 million). In its June 2017 environmental audit, USAID states that "the loan [provided by TLFF] will be used [...] as a debt swap against an existing loan with [...] Bank Negara Indonesia." The Vigeo Eiris report states that "33 %" of TLFF's loan to RLU would be used to repay BNI and confirms that BNI's mortgages "appear to have been used primarily for planting" (which includes land clearing).
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Chapter 2
https://voxeurop.eu/en/michelin-greenwashing-how-project-decried-for-environmental-impact-became-flagship-european-green-finance/
How a project decried for its environmental impact became a flagship of European green finance
This is the second part of our investigation into the financing of rubber plantations in Indonesia that was orchestrated by Michelin and BNP Paribas through the green-bond mechanism. We reveal that the tyre manufacturer ignored the warnings of NGOs and local stakeholders and was not transparent about the responsibility of its local partner in the prior deforestation of the areas concerned.

Fully established in Indonesia since 2004, in the early 2010s Michelin was looking for a local partner to strengthen its presence in Southeast Asia. The French tyre giant approached the Indonesian group Barito Pacific. Founded and directed by the billionaire Prajogo Pangestu, nicknamed the Indonesian "timber king", the conglomerate (now specialised in petrochemicals and energy) had a notorious reputation for environmental abuses. (See Chapter 1.)
According to Glenn Hurowitz, executive director of the NGO Mighty Earth, the first contact between the two companies took place in mid-2013. This was a few weeks before a first field visit by Michelin officials to Jambi province (on Sumatra Island) in October 2013. These dates, as he told Voxeurop, were confirmed to him by Hélène Paul, Michelin's purchasing manager at the time.
Contacted by telephone, Hervé Deguine, Michelin's public affairs director, described the birth of this Franco-Indonesian partnership as follows: "It all started when Barito's staff wanted technical advice on how to improve the efficiency of their natural rubber production. [...] We proposed a collaboration geared towards sustainable production so that the benefits would accrue not only to the companies, but also to the local communities."
Deguine went on: "During my first visit to Jambi in March-April 2014, I witnessed massive deforestation largely due to mafia groups [...] who had cornered land on a large scale." He said, however, that he had not personally witnessed any deforestation operations specifically by Lestari Asri Jaya (LAJ), the Royal Lestari Utama (RLU) subsidiary in which Michelin would soon hold a 49% stake in a joint venture with Barito Pacific. "The question for us was not who cleared the forest, but how to convince farmers who had always lived off deforestation - mainly they were planting oil palms - to change their source of income by planting rubber trees in our production areas and protecting the remaining forest instead of clearing it further."
In October-November 2014, a month before launching its joint venture with Barito Pacific, Michelin arranged another site visit. This time the company was accompanied by representatives of WWF and the British environmental consultancy TFT (now transformed into a Swiss-based foundation called Earthworm). "We wanted to get their [WWF’s and TFT’s] independent opinion on the social and environmental aspects before committing to the project," said Deguine.
The warnings of NGOs and independent experts
Michelin had commissioned TFT to conduct an audit of Lestari Asri Jaya's (LAJ) operations, which it became aware of in November 2014. TFT/Earthworm provided us a copy of this report, which has not been made public. It shows clearly what Mr Deguine appears not to have seen.
The document includes visual evidence of LAJ's ongoing deforestation of future rubber plantation areas at that time, including photos and geographical coordinates of the machinery involved in clearing forest areas that should have been left intact. Some of these zones are located along rivers and are essential for local wildlife. Others are near the concession boundary, right on the edge of the Bukit Tigapuluh National Park.
"After our audit, during which we observed excavators in action, we had to ask LAJ to suspend its land clearances and preparatory work to allow us to carry out the environmental and social assessments on behalf of Michelin," said Bastien Sachet, managing director of TFT/Earthworm, to Voxeurop.
As for the intention to plant rubber trees in place of a newly cleared forest, the TFT report concluded that "trying to portray the project in a positive light by presenting it as 'reforestation' would attract criticism." Sachet pointed out that, "although rubber trees are trees, growing them in an industrial plantation does not constitute reforestation."
Michelin was apparently not satisfied with these conclusions. The company declined Bastien Sachet's proposal to accompany RLU's green transition, and ended its relationship with TFT/Earthworm. It even announced in May 2015 in a press release that "the project involves the reforestation of three concessions [...] ravaged by uncontrolled deforestation." No details were given on who was responsible for this deforestation.
The TFT/Earthworm audit was not the first to sound the alarm on the environmental damage caused by Michelin's future partner. A report by a coalition of NGOs, including the Indonesian branch of WWF, warned in 2010 of the imminent danger to the virgin forest located in the Lestari Asri Jaya concession bordering the Bukit Tigapuluh national park in Sumatra. The report revealed that several villages in the area were concerned about the "upcoming deforestation by LAJ”.
In November 2015, WWF's local team also co-authored an investigation proving that LAJ was illegally logging in an endagered-species protection area known as Daerah Perlindungan Satwa Liar, as well as outside its concession area. These revelations came months after Michelin and Barito Pacific signed their joint venture and adopted their no-deforestation policy.

Green bonds, at any price
Clearly, these elements did not prevent Michelin's managers from contacting the Tropical Landscape Finance Facility (TLFF), an innovative financing platform for projects related to the Paris Climate Agreement that had just been co-founded by the French bank BNP Paribas with the support and environmental supervision of the United Nations Environment Programme (UNEP). The aim? To obtain financing via green bonds for a project whose profitability was under threat from the fall in natural rubber prices. (See Chapter 1.)
According to information obtained by Voxeurop, the tyre giant then failed to be transparent about the environmental history of the project. It simply claimed that prior illegal deforestation opened the way to "reforestation" and therefore to a project with positive impact. This rhetoric would later be enshrined in the green-bond prospectus.
According to Alex Wijeratna, campaign director at Mighty Earth, "the deliberate destruction of the environment by its onsite partner Royal Lestari Utama is not mentioned in any of Michelin's communications to its customers or green bondholders. Michelin was not legally involved at the time these deforestation operations were taking place, but due diligence reports show that Michelin knew what was happening." If true, such omissions could amount to misleading commercial practices under, for example, French consumer law.
Bastien Sachet of TFT/Earthworm told Voxeurop that he thought, "in a personal capacity", that "if green bonds are supposed to improve a situation from an environmental point of view – which is how Michelin presented the project to us, and I believe it how they presented it publicly – then investors should be informed in advance of the problems that the bonds will help to solve."
Michelin never made the TFT/Earthworm audit public, and refused to tell Voxeurop whether the report had been shared with members of the Tropical Landscape Finance Facility.
Asked about this, Satya Tripathi, who chaired the platform until 2018, told Voxeurop: "I do remember the report being mentioned at that time, but do not recall reading through it myself."
"The TLFF is committed to upholding transparency," said Johannes Kieft, current secretary-general of the TLFF and senior land-use specialist at the United Nations Environment Programme (UNEP), to Voxeurop. "I was aware of TFT/Earthworm report and of deforestation by Lestari Asri Jaya. The company had the legal obligation to clear logged over forest as it was licensed by the government to use the land for industrial forestry purposes", i.e. rubber production. (See Chapter 3, forthcoming, on the legal limbo surrounding logging in Indonesia.)
"We only learned about the TFT/Earthworm audit after the Mighty Earth report was released [in 2020] because it was commissioned by Michelin and not shared," confirmed a source working for Asia Debt Management (ADM Capital), a Hong Kong-based investment firm that co-founded TLFF with BNP Paribas, which issued the green bonds. The source was speaking to Voxeurop on condition of anonymity.
The audits of BNP Paribas, "the bank for a changing world"
A specialist who worked on the case, who also wished to remain anonymous, claimed that BNP Paribas was also aware of RLU’s deforestation. This expert suggested to Voxeurop that the UN sponsorship would have encouraged those involved in the deal not to look more closely: "Every member of the TLFF was confident since the deal had UNEP patronage and was properly documented."
Voxeurop also had access to the minutes of a meeting held in December 2020 between TLFF members and Alex Wijeratna of Mighty Earth. At that meeting, Robert Barker, then head of sustainable finance at BNP Paribas, denied any knowledge of Royal Lestari Utama's involvement in deforestation in Jambi at the time he was coordinating due diligence for the French bank. "I don't think this case can be judged on the basis of 'if we had known then what we know now'," he said. "We're talking about a time when most of us were not yet involved in this project." Robert Barker is now an independent consultant.
Voxeurop tried to contact him through a number of channels before his departure from BNP Paribas, without any response to date. The BNP Paribas communications department did not wish to comment.
Despite evidence that a very significant proportion of the area covered by the project had been deforested (see Chapter 1), none of the TLFF stakeholders seems to have objected to Michelin's ecological certification process.
At this stage, there is some reassurance for the investor who wants to make the world a better place. Didn't the process of obtaining a "green" certification rely on a thorough and independent analysis, taking into account the reports of the NGOs and TFT? Unfortunately, obtaining a green label is anything but a daunting challenge.
Getting a green label: the easy path to a green bond
Green bonds are becoming increasingly attractive to issuers and investors alike. "They sell for more than their non-green equivalents," said Caroline Harrison, research director at the Climate Bonds Initiative (CBI), the world's largest climate fundraising platform, to Voxeurop. "This means that the issuer pays a relatively lower cost to borrow money than it would have paid by issuing conventional bonds. In turn, the buyer sees the value of their investment rise more quickly."
Obtaining sustainability certification is a purely voluntary process. And it provides access to the magic of the "green" label that helps attract potential investors. All the applicant has to do is hire a qualified auditor from the International Capital Market Association (ICMA) to certify that the application complies with the association's green-bond principles. The reviewer's team examines the application based on documents provided by the applicant (who is also their client) as well as information available online. This is done without necessarily carrying out any on-the-spot checks.
A certification report is then issued. Known as a Second Party Opinion or SPO, it details why the project has benefits that meet ICMA's criteria on paper, but does not in any way guarantee that they actually do. The report should also mention any controversial issues that should be disclosed to investors.
In 2017, TLFF appointed the social and environmental ratings agency Vigeo Eiris as its auditor. The agency gave its green light in January 2018, a few weeks before the bonds were issued. The assets were technically qualified as sustainable bonds (a sub-category of the general ICMA definition of green bonds). Indeed, the Royal Lestari Utama project was not aimed at improving the environment per se, but rather at enabling sustainable agriculture that preserves biodiversity and strengthens local livelihoods.

Potential investors unaware of the environmental shenanigans
Subsequently, BNP Paribas, which was in charge of marketing the bonds, published a prospectus referring to the Vigeo Eiris bond certification report. To give the investment credibility, TLFF registered both documents on the Singapore Stock Exchange, Southeast Asia's main financial centre. This is where Barito Pacific and BNP Paribas have their regional headquarters.
The Vigeo Eiris certification report and the BNP Paribas prospectus are the only two official documents that potential buyers of TLFF green bonds could refer to when deciding whether to invest.
According to information gathered by Voxeurop, Vigeo Eiris conducted interviews with BNP Paribas and Royal Lestari Utama, but not with Michelin. The auditor apparently considered that the Indonesian company was the only entity responsible for business operations.
"Our Second Party Opinions are [...] based on different types of information such as public sources or documents brought to our attention by issuers," said Tim Whatmough, VP of communications for sustainability and ESG (environmental, social and governance) at Moody's, one of the world's largest rating agencies, to Voxeurop. Moody's acquired Vigeo Eiris in 2019.
An auditor's analysis of the issues is based on the information available at the time of the assessment. Ultimately, it is the bond issuer that chooses which items to disclose. Royal Lestari Utama representatives did not share any information regarding deforestation. This would explain why the TFT/Earthworm audit never made it to the offices of Vigeo Eiris. "The report was not ours. It was commissioned by and for Michelin", commented the communications department of RLU to Voxeurop. However, TFT's assessment does appear on the sustainability timeline published by Royal Lestari Utama.
In terms of publicly available information, the only source used by Vigeo Eiris was Factiva, a business intelligence database. Their assessment states that "no ESG issues have been identified within RLU [...] in the last 48 months". However, Vigeo did not seek information on Lestari Asri Jaya (LAJ), the local RLU subsidiary responsible for deforestation in Jambi province (in Sumatra). There is thus no mention of the track record of LAJ. Nor is there any reference to publicly available material, such as the reports by WWF and other NGOs mentioned above, which highlight LAJ's disastrous environmental record.
Despite the revelations, the (top) rating for green bonds remains unchanged
In a November 2020 email, a copy of which was obtained by Voxeurop, Alex Wijeratna sent the Mighty Earth report to Emilie Beral, at the time director of methodology for sustainable finance solutions at Vigeo Eiris. Her response came in January 2021: "We did not have access to the assessment report that Earthworm did for Michelin [in November 2014]. The Mighty Earth report has been added to the list of complementary sources [...]. Our teams have analysed and interviewed directly the companies mentioned in this report [...], this will underpin our assessment of the environmental, social and governance criteria of the project." To date, Vigeo Eiris/Moody's has not revised its assessment.
Was LAJ’s deforestation a controversial issue that the project's stakeholders should have disclosed to Vigeo Eiris? Or one that Moody's should now report to investors, given subsequent developments? Voxeurop asked these questions to Tim Whatmough of Moody's. He did not wish to respond.
It should be noted here that Moody's is the rating agency that has assigned the highest rating - AAA - to the Class A bonds issued by the TLFF. This rating is the most coveted by investors. "This is clearly a conflict of interest that casts doubt on the credibility of the voluntary-governance regime for green bonds," said Alex Wijeratna of Mighty Earth to Voxeurop. "We believe that not interviewing Michelin was a serious mistake, given its central role in the joint venture with Royal Lestari Utama since 2014. But the fact that Vigeo Eiris did not verify Lestari Asri Jaya is even more unbelievable, when we know that the prospectus issued by TLFF clearly identifies LAJ as an operating subsidiary of RLU in Jambi."
Voxeurop consulted other auditors certified by the International Capital Market Association. Several agreed to respond on condition of anonymity. According to one of them, "issuing green bonds creates a lot of expectations among investors, so we encourage issuers to make full disclosure. Our due-diligence process encourages us to find out what the land was like before we started trading. If any hidden information were to surface after our assessment, we would take responsibility for it, and we would inform the public, so that investors could ask the bond issuer why that information was not there."
According to another ICMA auditor, "the question of whether Second Party Opinions should be audited or subject to review is currently being discussed. Deliberately misleading investors is not a long-term strategy and damages the reputation of the parties involved."
Christa Clapp of Cicero Shades of Green, a consultancy specialising in green bonds, confirmed that "the bond issuer usually informs the investor of the impact of the project". However, she said, "this does not necessarily include past deforestation. I think this is a weakness in the market." However, she added: "If any new information came to our attention after our assessment, we would be obliged to update our Second Party Opinion."
Environmentally minded investors can only deplore the fact that the current guidelines of the International Capital Market Association require the review of SPOs only when the bond issuer itself requests it.
In Europe, the historic success of RLU green bonds
During the bond offering campaign, WWF International refrained from any public criticism of the secrecy maintained by Michelin and TLFF regarding the history of deforestation. In a 2019 report evaluating its partnership with Michelin, WWF at no point mentions Royal Lestari Utama's responsibility for clearcutting forests, referring simply to "a largely deforested wildlife-hostile environment".
According to Alex Wijeratna, "there was a split within WWF between the international office and the Indonesian branch. The Indonesian branch was very concerned about the destruction of the landscape. Six people left WWF in Indonesia as a result of the partnership with Michelin." In March 2020, WWF withdrew from the project due to "concerns about [Michelin's and RLU's] commitment to conservation and [the] lack of transparency," a WWF spokesperson said.
None of this has prevented the whole venture from being lauded in high places far from the forests of Indonesia. Indeed, it is now presented as an emblematic achievement of Europe's naissant green-finance sector.
In February-March 2018, the TLFF closed its pilot transaction (TLFF I) of $95 million long-dated bonds (a second tranche of $120 million was planned but never completed).
This landmark deal allowed BNP Paribas to prove that it was a global pioneer in green finance. In December 2017, under the patronage of French president Emmanuel Macron, BNP Paribas and the United Nations Environment Programme (UNEP) partnered to create their Sustainable Finance Facilities (SFF) programme. The aim was to attract $10 billion of private investment by 2025 to support sustainable business projects in developing countries. At the launch ceremony, the TLFF was presented as the kick-off of UNEP's collaboration with BNP Paribas.
The UN has partnered with Michelin to make the green bond marketing campaign a success. Gabriela Flores, Senior Associate of the UN-REDD programme, stated publicly in 2018 that the Royal Lestari Utama rubber plantation project had been judged against international standards for sustainable bonds.
To top it all off, the United States Agency for International Development (USAID) guaranteed to cover 50% of the net losses on two-thirds of the TLFF loan amount. It was this guarantee that enabled the A-class bonds (which represent 30% of the total value of the bonds) to obtain the maximum AAA rating.
When asked by Voxeurop about USAID's assessment report on the project, Jeff Cohen, the agency's head in Indonesia, also chose not to comment on RLU's responsibility for deforestation: "Our partial loan guarantee by TLFF has allowed RLU to rehabilitate land that had been degraded in the past with sustainably managed rubber plantations.” (1)
One third of the Class B bonds sold by BNP Paribas were acquired by the Netherlands-based &Green fund (for $23.75 million). This fund had received a capital contribution of $2 million from UNEP. PG Impact Investments (now Blue Earth Capital) bought them for $9.3 million. The French bank sold the remaining bonds to its network of clients.
In the opinion of Satya Tripathi, the ex-secretary-general of the TLFF, it was a well-organized operation: "Even Michelin invested $20 million in these bonds, which provided confidence to other investors."

Footnotes
1) Like USAID, other public and private development cooperation agencies have refused to share with Voxeurop and Mighty Earth the due-diligence documents on which they based their decision to fund the project after the green bonds were issued. These include the French Development Agency (AFD), the UK-based Partnerships for Forests (P4F) and the Netherlands-based Sustainable Trade Initiative (IDH).

 

 

 

 

 

 

 

Chapter 3
https://voxeurop.eu/en/indonesia-michelin-turns-blind-eye-environmental-vandalism/
How Michelin and its Indonesian partner sidestepped the rules for green bonds
Royal Lestari Utama, Michelin's Indonesian partner (which it now controls), enticed environmentally-responsible investors to finance its rubber plantations in Sumatra by disguising its responsibility for deforestation. It thus flouted the international rules on green finance to which it had signed up. The story is a textbook case of greenwashing.
In the previous chapters, we saw how in 2018 Michelin used green bonds to finance the rubber plantations of its new Indonesian partner Royal Lestari Utama (RLU) in the Indonesian province of Jambi, on the island of Sumatra. The bonds, designed to support sustainable projects and marketed by BNP Paribas, were issued by the new sustainable-finance platform Tropical Landscape Finance Facility (TLFF). They were also endorsed by a number of third parties who were found to have based their assessments solely on documents.
Michelin and its partners also ignored warnings from grassroots organisations about the industrial-scale deforestation previously carried out by RLU's local subsidiary. In order not to jeopardise the success of a model project, Michelin and the founders of the TLFF failed to communicate these facts to potential investors, who might have been less enthusiastic if they had known about them. We will now look at how all this was possible – and why it should not have been, given the rules of green finance and the situation on the ground in Sumatra.
It was the "visa" granted in January 2018 by the ethical-investment ratings agency Vigeo Eiris, certifying compliance with the principles of the International Capital Market Association (ICMA), that allowed TLFF bonds to be registered in the database of Climate Bonds Initiative. CBI is the world's leading certifier of climate fundraising, and Vigeo Eiris is a CBI-approved auditor.
The accreditation of the bonds in the CBI's Climate Friendly Investment Showcase helped their reputation and visibility to potential investors. "Our database is searched to see what is green. If bonds do not meet the criteria of our database, they cannot be included in the green-bond indexes," explained Caroline Harrison, research director at CBI, to Voxeurop. This was confirmed by Alex Wijeratna of the environmental NGO Mighty Earth: "Portfolio managers can assume that if TLFF bonds are part of a reputable green index, then the investment is good to go."
CBI considered that Royal Lestari Utama's plantations provided benefits for climate protection, since the cultivation of rubber trees was a form of carbon sequestration. Furthermore, the involvement of local farmers in rubber production, alongside food crops, improves their living conditions and prevents them from having to further expand their agricultural land at the expense of forest areas.
Relying on the flawed Vigeo Eiris assessment (see Chapter 2), CBI endorsed the TLFF's obligations without taking into account the greenhouse gases released by past deforestation. CBI could not have been aware of this, given that RLU and BNP had failed to report it to Vigeo Eiris. Moreover, CBI’s methodology in the agricultural sector considered that a reduction in emissions during the period of the investment - which in this case officially began in 2018 (the date of the transaction by TLFF) - was sufficient. However, we learned (see Chapter 1) that the green bonds were partly used to finance, retroactively, the clearcutting that took place prior to the joint venture between Michelin and Barito. Rather than sequestering carbon, this deforestation contributed to carbon emissions.

A breach of the principles of green bonds
In a letter to the Climate Bonds Initiative in March 2021, Mighty Earth asked it to remove the TLFF bonds from its database. The environmental NGO argued that "this failure to disclose [...] the known key information that the subsidiary of Michelin's local partner [...] was one of the major causes of the land clearing and deforestation on its concessions in Jambi [...] constitutes an extremely serious - and ultimately misleading - omission and [...] a gross violation of Green and Sustainability Bond principles" established by ICMA. These require transparent disclosure of the environmental risks associated with funded projects (1).
According to an ICMA expert on sustainable finance who wished to remain anonymous, "it should be clear that land conversion and deforestation are not in the spirit of green bonds, even assuming that the final [outcome] is green, as in the case of sustainable agriculture for example. External auditors and investors would doubtless not endorse this [as] their reputation could suffer." Indeed, ICMA principles require that the sums collected through green bonds be invested, among other things, in the “environmentally sustainable management of living natural resources and land use (including environmentally sustainable agriculture; [...] environmentally sustainable forestry, [...] and preservation or restoration of natural landscapes). As unveiled by Voxeurop through analysing official documents (see Chapter 1), RLU used a third of the borrowed money to repay previous bank loans, with which it financed land clearing and rubber plantations developed before Michelin joined the game. These activities certainly do not represent an example of "sustainable management" as defined by ICMA.
On the subject of Mighty Earth's initiative, Sean Kidney, executive director of CBI, told Voxeurop: "We don't do field checks, we rely on independent reviewers. In this case, the bonds had received a second opinion [the assessment of Vigeo Eiris, a ratings agency specialised in ethical investments] and the original documents made no reference to any deforestation. On the other hand, if we find out from our own sources in Indonesia that there has been a problem, then we will simply remove the bonds from our list. Indeed, under our retrospective period, no deforestation must have taken place in the last ten years." Michelin has already repaid the bonds to investors, so any action by CBI would now come a little late.
Paul Vermaak, director of standards at CBI, told Voxeurop: "Our database can accept bonds that support the sustainable transition of agribusinesses with a history of land conversion – i.e. it must have taken place long before – but not those that might support companies that have cleared the forest just before publishing a 'no-deforestation policy'. This would be a manipulation of the system to unfairly extract money from investors. It would be up to ICMA's qualified reviewers to avoid such an unintended consequence."
Vermaak confirmed that "if the company has deforested the land, this means that it has generated significant [carbon] emissions and removed a high-carbon-sequestration habitat, before replacing it with lower-sequestration agricultural production activities. Such a scenario is implicitly inconsistent with our taxonomy" (2). He added that the CBI is committed to revising its assessment criteria to exclude, in the future, any project that does not comply with the "Do no significant harm" (DNSH) principle (3).
To hide the clearcutting that preceded the joint venture between Michelin and Barito Pacific could thus reasonably be described as a breach of the green-bond guidelines set out by the International Capital Market Association and the CBI. It also compromised RLU's adherence to the Environmental and Social Sustainability Performance Standards of the International Finance Corporation (IFC), the private investment arm of the World Bank.
Indeed, the environmental, social and governance (ESG) criteria mentioned in the green-bond prospectus proclaim full compliance with the ICMA principles as well as with the IFC standards. Royal Lestari Utama should therefore have been subject to the same environmental and social requirements as those for companies applying for IFC funding. In its Second Party Opinion – a form of audit – Vigeo Eiris made it clear that the environmental benefits of the project "are conditional on the implementation of the [...] IFC performance standards".
Among these, the chapter on conservation blacklists projects that result in a net loss of biodiversity – a concept that includes any natural forest that represents an important habitat for threatened species or for indigenous communities.
Without referring specifically to RLU, the IFC press office suggested that its venture might well fall under this non-compliance clause. In an email exchange with Voxeurop, it said that "the implementation of the national legal framework" and "the company's non-deforestation policy do not come into play [...], i.e. it does not matter whether or not the company had such a policy or a clearing permit (where it has degraded the habitat), it still has to prove [...] that its project resulted in no net loss (of biodiversity) [...]" to comply with the IFC standards.
In particular, the IFC considers that companies are liable for any biodiversity loss they cause by deliberately degrading a natural habitat "in anticipation of obtaining financing from a lender [...] for the project".

Deforesting and replanting, as quickly as possible
This seems to be exactly what happened. The confidential report of the auditing firm TFT/Earthworm, seen by Voxeurop, shows that Lestari Asri Jaya (LAJ), the RLU subsidiary that operates the Jambi concessions, continued to clear land until late 2014. Indeed, according to both the green-bond prospectus and the latest independent report on environmental protection in the LAJ concession, published in May 2022 by Remark Asia and Daemeter Consulting, rubber planting in fact exploded (4) between early 2013 – when Michelin first visited the site – and late 2014, when the joint venture was signed.
"The Michelin-Barito Pacific joint venture had planned from the start to seek new financing," a source familiar with the RLU project told Voxeurop on condition of anonymity. "But the banks did not consider the rubber plantations to be assets sufficient to constitute a mortgage guarantee, as the joint venture had hoped. And that was because the land is owned by the government, and the government's licence to RLU is time-limited."
According to Alex Wijeratna of Mighty Earth, "All of this is evidence enough that the conversion of the forest to rubber plantations was accelerating in anticipation of the deal that Michelin and Barito Pacific had been negotiating for months. It seems that their intention was precisely to maximise the plantation area in order to secure financing for their project, which in reality had begun long before the joint venture and RLU's declaration of non-deforestation."
The prospectus of the green-bond offering marketed by BNP Paribas confirms that total production includes rubber trees planted before 2015. These account for more than half of the area converted at the time of the bond issue.
Wijeratna concludes: "It is reasonable to say that these green bonds are the result of a long-planned quest for funding. Habitat destruction is being pushed forward with the complicity of Michelin." (Map 1)
The decision to clear the forest to plant rubber trees does not even appear to qualify under an IFC derogation, which states that "significant degradation of the natural habitat will only occur if" the company in question "can demonstrate that no viable alternative exists for the project". The report on LAJ by Remark Asia and Daemeter Consulting states that in 2010 there were over 17,000 hectares of open space and bushland (27% of the concession) available for rubber planting.
"From 2014, during our successive field visits, we observed areas that had been deforested and planted with rubber trees, even though they were unsuitable for rubber farming. Conversely, other areas, more suitable, were not being exploited," confirmed Hervé Deguine, Michelin's public affairs director, to Voxeurop. "There was a government plan that RLU was supposed to follow regardless of the situation on the ground, by which it should avoid continuing to plant in places that were not suitable from an agricultural point of view. But [in practice] it often contested this", he added.
All this is to say that the Royal Lestari Utama project does not strictly comply with International Financial Corporation standards. These standards would hold the company responsible for the loss of biodiversity that it caused – before adopting its no deforestation policy for the joint venture – by its clearing of the forest in spite of the available alternatives.

”Natural" deforestation: a convenient option for Michelin and its partner

In a response published a few weeks after a Mighty Earth report revealed the extent of deforestation carried out by its subsidiary Lestari Asri Jaya in its Jambi concession, RLU explained that industrial deforestation prior to the signing of the joint venture was only in areas "already considered degraded, logged or shrub land at the time these licences were initially granted". Deguine confirmed to Voxeurop that Michelin still supports the position that RLU expressed before it was bought out by the French multinational. "Whether Michelin is a minority shareholder, as it was in the past, or a sole shareholder, as it is now, does not change anything in this respect," he told Voxeurop.
Johan Kieft, secretary-general of the TLFF financing platform and UNEP’s green-economy expert, also agrees with Royal Lestari: "RLU has only cleared areas that have been identified as having low biodiversity or low carbon [storage] value based on independent verification and monitoring." Kieft sent us a presentation which does not, however, confirm his claim.
Such statements may give the false impression that before RLU's intervention, the habitat was already so degraded that clearcutting did not result in substantial biodiversity loss.
This is exactly how the Climate Bond Initiative saw the case: "Following Mighty Earth's complaint, we made inquiries and it appears that the small piece of land in question was degraded land that had been turned into a rubber plantation," said Sean Kidney, CBI's executive director, to Voxeurop.
However, the International Finance Corporation is clear that "human-induced habitat modification is [...] not necessarily an indicator of its biodiversity value" and "if, in the opinion of a competent professional, the habitat still contains [...] one or more native ecosystems, it should be considered a natural habitat, regardless of its degree of degradation."
Indeed, environmental experts and documents consulted by Voxeurop confirmed that the area cleared by RLU’s subsidiary Lestari Asri Jaya was still an integral part of the forest habitat of Bukit Tigapuluh National Park, which the Indonesian government itself had deemed vital for endangered species.
Royal Lestari Utama thus seems to have damaged an ecosystem which, although already degraded, was still a forest and a natural habitat. It did not adhere to the green-bond standards of the International Capital Market Association and the Climate Bonds Initiative. And it did not meet the environmental performance standards of the International Finance Corporation. It failed in its obligation to its investors.

Footnotes
1) These principles "emphasise the need for transparency, accuracy and integrity of information disseminated and included in issuers' reporting to stakeholders". They state that "the issuer of a Green Bond is strongly encouraged to disclose to investors [...] additional information about the processes by which the issuer identifies and manages the social and environmental risks associated with the project(s) concerned".
2) The Climate Bond Taxonomy "identifies the assets and projects needed to achieve a low-carbon economy and provides criteria for screening GHG emissions consistent with the 2-degree global warming target set by the 2021 Paris Agreement."
3) This was introduced into the European Union's environmental taxonomy to ensure more effective protection of biodiversity as part of the Post-Covid Resilience Plan.
4) From 882 hectares converted to rubber plantations at the end of 2012 to 5782 hectares at the end of 2014.

 

 

 

 

 

Chapter 4
https://voxeurop.eu/en/indonesia-michelin-turns-blind-eye-environmental-vandalism
In Indonesia, Michelin turns a blind eye to environmental vandalism
In this fourth part of our investigation into Michelin's financing of rubber plantations in Sumatra, we look at the ravages wrought by the clearcutting. A sacrifice of wildlife and biodiversity which took place in full view of the protagonists.

In the previous chapters, we revealed how Michelin and the stakeholders of the Tropical Landscape Finance Facility (TLFF) – the platform that issued the green bonds used by Michelin and its Indonesian partner Barito Pacific to finance the development of their rubber plantations (see chapters 1, 2 and 3) – concealed and then downplayed the ecological devastation caused by Royal Lestari Utama (RLU). RLU had cleared the forest just before the French company became a minority shareholder in late 2014. (Barito then held 51% of the property, which was eventually bought out in summer 2022 by Michelin.)
Both the opinions of environmental experts and the documents that Voxeurop has consulted lead to the same conclusion: the land that was turned into rubber plantations before Michelin acquired its stake in RLU should have been preserved. It was part of the large forest ecosystem of Bukit Tigapuluh, or "Thirty Hills".
The destruction of this habitat renders Michelin’s and Barito's project non-compliant with the international standards that the two partners committed to when they used green bonds to finance it. In reality, Barito's enterprise started long before the two actors formalised their collaboration at the end of 2014 (see Chapter 3).
Straddling the provinces of Jambi and Riau (the most deforested in Sumatra), the green expanse of Bukit Tigapuluh includes the national park of the same name, established in 1995, as well as the surrounding forests – or at least what remains of them today. At the time that Lestari Asri Jaya (LAJ), a local subsidiary of RLU, obtained its clearing permit in Jambi, these forests made up almost half of the Bukit ecosystem. As of 2010, the total forest cover was 320,000 hectares (20% of which falls within the current LAJ concession). This was already only half of the 622,000 recorded in 1985, according to a 2010 report co-authored by several NGOs, including the Indonesian branch of WWF.

Primary or secondary forests: a crucial issue of definition
Barito Pacific thus managed to deal a major blow to the primary forests of this region in an entirely legal manner – by taking advantage of the lax regulatory framework in Indonesia.
According to scientific understanding, primary forests are defined as woodland that has not been completely cleared and then regrown, regardless of whether it has been altered by human intervention in some way.
In contrast, by Indonesian law, as well as by the definition of the Food and Agriculture Organisation (FAO), primary forest is interpreted more narrowly. (1) In this view, even forests that have been slightly degraded by selective logging (harvesting of a small amount of timber – as distinct from clearcutting, where the majority of trees are felled) – fall into the category of secondary forest.
Unlike primary forests, secondary ones are not protected by the moratorium on deforestation, which was only adopted in 2011 by the then Indonesian President Bambang Susilo Yudhoyono (and extended by him and his successors since). (2)
"In Indonesia, a company can apply for a permit to selectively log a primary forest, which the government then has the option of re-labelling as secondary before granting a clearing licence, so logging companies – such as LAJ – can formally claim not to log primary forests," Matthew Hansen told Voxeurop. A remote-sensing researcher in the Department of Geographic Sciences at the University of Maryland, he has helped develop the world's largest database and most robust methodology on primary-forest loss. The process described by Hansen is precisely the one that Barito would have used. (3)
Prior to giving the green light to the clearing by LAJ and other similar companies, the Indonesian environment ministry only allowed selective logging in the Bukit Tigapuluh forest ecosystem. This was in the 1990s, when much of the local forest was still classified as primary. The largest selective logging company active in the area was Asian Forest Industries (IFA), also owned by the Barito Pacific group, as discovered by Voxeurop. Barito Pacific owned IFA through its subsidiary in the name of Barito Pacific Lumber, as evidenced by a notarial deed from 2020 unearthed by Voxeurop.
Once it expired at the turn of the century, its concession of about 300,000 hectares was gradually split into multiple concessions for intensive exploitation (allowing the conversion of forests into agricultural production). Among them was the 62,000-hectare plot granted to LAJ in 2010. The forested part of this parcel was "de-classified as secondary forest in 2008", explained Johan Kieft, Secretary General of TLFF and UNEP's senior specialist on land use and the green economy, to Voxeurop. Kieft thus implicitly confirms that LAJ brought back to Barito 20% of the former IFA area – which was situated in a portion that had until recently been categorised as primary forest. And along with it came the right to clear the land.
This background is noted in the 2010 NGO report mentioned above. It cites a 2005 field study by local NGO KKI Warsi and Bogor Agricultural University, which concluded that the native forests in the former IFA concession, although selectively logged, still retained a volume of wood with a high carbon-storage potential and that it would therefore make more sense to restore them than to convert them to plantations. (4)
"Primary forests that are selectively logged and therefore legally categorised as secondary" – such as those that were permanently cleared by LAJ – "still have the capacity to provide important biodiversity and carbon sinks", Hansen concurs.
"Degraded forests can recover naturally or through assisted restoration, and eventually return to their primary-forest state," echoes the FAO Forestry Department.
"Our analyses show that before being allocated to LAJ, the area had dense natural forest with old growth trees, although it was not completely intact and may not have qualified as primary under Indonesian rules," said Elizabeth Goldberg, head of Global Forest Watch (GFW). She cites an interactive map tracking the loss of primary forests worldwide since 2001, regardless of whether they have been downgraded by national laws.
Locals in the deforested areas confirm what the satellite observations and interactive maps tell us. For example, Sumbasri, a farmer who has lived since 1975 in the village of Pemayungan, which is now located right in front of RLU's rubber plantations, told Tempo reporters that "before LAJ's clearing, there was still a forest, although not a very dense one, since the biggest trees had been cut down by IFA before".
The TFT/Earthworm audit report commissioned by Michelin (see Chapter 2) concluded that clearcutting in the concession had also affected areas of high biodiversity alongside the Bukit Tigapuluh National Park, that should have been protected.
The reliability of the environmental impact assessment approved by the Jakarta government in 2009, which would have allowed Lestari Asri Jaya to destroy valuable but degraded ecosystems, is implicitly questioned even by Michelin's public affairs director. "We found a valuable forest where [according to LAJ's logging plan] there should only be bushes to clear. We had to change the plans to protect these places," Hervé Deguine told Voxeurop, referring to the period following the signing of the joint venture with Barito Pacific, before which Michelin could only passively watch the industrial deforestation.
Furthermore, the Indonesian government itself recognised in 2007 in its conservation plans (5) that protecting habitats such as Bukit Tigapuluh was crucial to saving animals at high risk of extinction, such as the tiger, elephant and Sumatran orangutan. All three are listed in the International Union for Conservation of Nature’s. These mammals prefer to live in the lowland rainforest, which is less protected because it is outside the national parks. Often mountainous, like Bukit Tigapuluh, these parks are more difficult for the animals to access.
In 2008, the National Park Office and the Indonesian Nature Conservation Agency (BKSDA) had agreed to the delineation proposed by the NGOs (including the Indonesian branch of WWF) to expand the protected forest area from the 143,223 hectares of the national park to a total of 348,084 hectares including the surrounding forests. In 2009 an implementation plan, developed by the Frankfurt Zoological Society (FZS), was agreed by NGOs (such as WWF) and local governments. It was also officially approved by the Directorate General for Natural Resources and Ecosystem Conservation of Indonesia’s environment ministry. For their part, the NGOs involved insisted that the government revoke the commercial licences in the area to be protected (including those resulting from the split of the IFA area, including LAJ).
However, despite its commitments, even at the international level, the Indonesian government gave in to economic interests. The area that should have been called "Bukit Tigapuluh Ecosystem" never saw the light of day and was instead largely left to the clearcutters.
Contrary to the mantra posted in response to Mighty Earth's critical report, Royal Lestari itself finally acknowledged in its 2020 sustainability report that the LAJ concession incorporates "an essential ecosystem [...] where wildlife roam[s]" freely. It finally promised to manage the area sustainably in collaboration with the BKSDA and the National Park Board (10 years after the NGOs' request). It is a pity that this acknowledgement of the facts comes only after the destruction, and replacement with rubber plantations, of almost all the forest that bordered the Bukit Tigapuluh Park.
For Alex Wijeratna, campaign director of environmental NGO Mighty Earth, "It seems RLU was defining the same contiguous forest area as either ‘degraded’ or ‘essential’ depending on whether the aim was to convince investors that the part cleared was not worth protecting or to persuade them that protecting the remaining trees was worth their money."
Yet the ecosystem was always an integrated whole, both before and after the joint venture and the bond issue. This is confirmed by the UNEP Atlas of Globally Important Biodiversity Areas, hosted on the Global Forest Watch platform. The atlas includes the declining Jambi forest as one of the last refuges for animals on the IUCN Red List of threatened species.
Chetan Kumar, senior programme coordinator at IUCN, told Voxeurop that IUCN's policy "focuses on protecting primary forests, but also on the need to prevent the loss, and ensure the restoration, of degraded forests that can provide habitats for specific species, such as elephants in Sumatra."

Rubber plantations where elephants roamed
Together with the Bukit Tigapuluh National Park, the northeastern boundary of the Lestari Asri Jaya concession forms a homogenous landscape of high biodiversity. The park is home to a large population of elephants, as well as tigers – it is one of the Global Priority Landscapes for their conservation – and orangutans. The latter have been introduced through a programme that has covered much of Sumatra since 2001, mainly in the Bukit Tigapuluh ecosystem.
"The secondary forest that LAJ cleared was part of the core habitat of elephants and other large mammals because of its very high food density," said a conservation expert who witnessed the clearing operations and who wished to remain anonymous.
RLU/LAJ specifically targeted the forest in the portion of the LAJ concession known as Block 4, located at the southeastern end of the concession, on the edge of the national park.
"Block 4 of the LAJ concession [see map below], in particular, is a vital corridor for elephants, where these animals come to feed by transiting between conservation areas outside the company's concession," said our anonymous conservation source. As a link between the national park and the two concessions, this area plays an important role in restoring the ecosystem – one that WWF managed from 2015-2020, before it ended its relationship with RLU (see Chapter 1). "Elephants use this passage because they can't go around either from the north, where the park is very steep, or from the south, where they would be in densely populated areas."
According to calculations by Leo Bottrill, managing director of geospatial technology company MapHubs, the elephant ecosystem on the fringes of the national park lost 2,590 hectares of trees (out of a total of 3,232 in Block 4) between April 2012 and January 2015 due to forest clearance. The majority (59%) of the rubber trees already planted in the LAJ concession when Michelin officially intervened in early 2015 (see Chapter 1) were in this area.
Bottrill estimates that RLU also cleared 3,852 hectares in Block 1 of the same concession, on the edge of the Limau Protected Area (in the northwest corner of what should have been the Bukit Tigapuluh Ecosystem), and 1,384 hectares in the small WMW concession.
Local conservation activists told Voxeurop, on condition of anonymity, how things seem to have unfolded on the ground. In their view, Royal Lestari Utama neglected the protection of elephant habitat and surreptitiously pursued its routine agribusiness, even after Michelin joined the group. Their account breaks the omerta that RLU has imposed, via confidentiality clauses, on the NGOs involved in the various conservation programmes in Jambi. These include WWF, the Frankfurt Zoological Society (FZS) and the Forum Konservasi Gajah Indonesia (FKGI). Together they had fought unsuccessfully for the creation of the large Bukit Tigapuluh Protected Area that was agreed – on paper – with the Indonesian authorities in 2009.
Since the meeting on land-use planning at the Ministry of Environment and Forestry in November 2010, and in follow-up interactions with LAJ (which had now obtained its clearing permit), these NGOs submitted several studies, supported by data from the BKSDA. This information showed the importance of the remaining forest and shrubland within the concession, not only for elephants, but also for tigers and orangutans.
Royal Lestari initially promised that most of the secondary forest in Block 4 would be kept intact or selectively logged and then allowed to regrow. But before long, the conversion of wildlife habitat to rubber monocultures began. In 2013, elephants and other animals began to be driven off the plantations in Block 4, increasing human-wildlife conflicts in the surrounding villages and smallholder farmlands.
Royal Lestari also indirectly contributed to further deforestation and loss of biodiversity in the region by facilitating non-industrial clearing (by illegal loggers). In order to extract the logged trees, roads were built through previously remote forest areas to the Bukit Tigapuluh National Park. According to the Mighty Earth report, old tracks were upgraded and over 100km of new roads were built between April 2012 and 2015.
This opened up access to farmers as well as to poachers and illegal loggers (mostly “immigrant” land speculators from other parts of Indonesia). They infiltrated not only the LAJ concession itself, but also the adjacent forest areas, which are virtually unmonitored by the company's security guards. Non-industrial deforestation, equivalent to 30,000 hectares (more than 70% of the concession's 42,000 hectare forest area in 2009), has thus progressed in parallel with the industrial sort (20% of the area), as Leo Bottrill's cartographic timeline shows.
In an email to Mighty Earth quoted in the NGO's 2020 report, Michelin downplayed the impact of RLU's activities, saying that deforestation by locals should be attributed solely to the "permit to open a road corridor [...] in the [LAJ 4] area" (6), which the government granted to the neighbouring Sinar Mas Group's Asia Pulp & Paper (APP) company.
Michelin failed to mention, however, that LAJ itself made use of this same road, as indicated in a report co-authored by WWF and local NGO KKI WARSI. It used the road to transport timber that had been harvested since 2010 from its own concession – after clearcutting the trees for rubber plantations, LAJ/RLU sold the timber to local sawmills. Its customers also included APP's own pulp mills, according to a letter signed by several local NGOs.
In their 2010 report mentioned above, the NGOs denounced the 82-km road that APP had started building through Bukit Tigapuluh National Park in July 2007 – illegally (the environmental impact assessment would be approved only a few months later). The road was built expressly to transport timber to its pulp mills from its partners' concessions, including the LAJ concession (which was to receive a government logging permit shortly thereafter).
"When they got the concession, LAJ/RLU were making money mainly from selling high-value timber, so they needed to clear the forest," says Alex Wijeratna of Mighty Earth. "It was only when Michelin met with them and advised them that they began to seriously consider setting up a rubber business," he concludes.
Thus RLU/LAJ was able to kill two birds with one stone: it sold the trees cut in its concession and planted rubber trees on the cleared land. The deforestation only stopped after the joint venture between Barito Pacific and Michelin was signed and their respective non-deforestation policies were published. That was always going to be too late to protect them from suspicion of greenwashing.

Footnotes
1) The FAO defines primary forest as "a naturally regenerated forest of native tree species, where there are no clearly visible signs of human activities and where ecological processes are not significantly disturbed".
2) The moratorium on deforestation was prolonged until 2015 and made permanent in 2019.
3) A study by the University of Maryland found that more than 90% of Indonesia's primary forests were eventually completely razed after being degraded by initial human intervention, such as selective logging. These forests were considered secondary by the authorities in Jakarta and were not protected. As a result, the country had only reported half of its primary forest loss to the FAO by 2015.
4) Darusman, D., Bahruni, Siswoyo & Trison, S. (2006) Final Report: Valuation of Forest Resources in Area of ex PT. Industries et Forest Asiatique (IFA), West part of Bukit Tigapuluh National Park. Cooperation between KKI Warsi & Laboratory of Forest Policy, Economic and Social Faculty of Forestry, Bogor Agricultural University.
5) Departemen Kehutanan (2007) Strategi dan Rencana Aksi Konservasi Harimau Sumatera (Panthera tigris sumatrae) 2007-2017. Departemen Kehutanan (2007) Strategi dan Rencana Aksi Konservasi Orangutan Indonesia 2007-2017. Departemen Kehutanan (2007) Strategi dan Rencana Aksi Konservasi Gajah Sumatera dan Gajah Kalimantan 2007-2017.
6) Email from Hervé Deguine, Michelin Public Affairs Director, to Mighty Earth on 7 July 2020.